Next budget big challenge for Tories

The Harper government faces its biggest challenge in drafting the forthcoming federal budget.

The problem is that three of the biggest drivers of the economy -- consumer spending, business investment and government activities -- have difficulties.

In good times, consumers account for more than 60 per cent of our economic activity. Now, however, many of them feel a bit shaky.

Income growth has been sluggish and household debt has reached its highest level in history -- 153 per cent of annual after-tax income. Last week, the Bank of Canada said it will likely increase this year, which means we are getting closer to the 160 per cent figure America reached just before its economy tanked in 2008.

Bank of Canada Governor Mark Carney has warned several times that Canadians are carrying too much debt and have been for some time.

Business has a different problem. The latest Statistics Canada figures -- for the third quarter of 2011 -- show Canadian business is sitting on more than $583 billion in Canadian currency and deposits, and more than $276 billion in foreign currency.

Since last year, these cash reserves have climbed nine per cent and 27.3 per cent since 2007, when the Canadian economy was booming.

Carney repeatedly tells business that now that consumers have debt problems it is time for business to step up and provide some push for the economy. But Perrin Beatty, CEO of the Canadian Chamber of Commerce, says business doesn't invest until it thinks it will get a return.

"You're not going to go off and hire somebody," he says, "if you think you're going to be selling less stuff next year than you did this year."

Carney replies now is a good time to invest because low demand has made some machinery costs cheaper and weakened companies are less able to counter Canadian moves into good markets such as China and India.

It makes little sense, says the governor, to "wait out" the current problems in hopes that things will soon be back to normal.

The net worth of Americans has fallen to five times their income from 6.5 per before the recession, and it will take years to rebuild their lost wealth. Europe won't see pre-crisis levels of output until about 2014.

That leaves government. Ottawa borrowed and spent a lot of money helping the economy through the 2008-09 recession. Now, it wants to start paying down its debts.

The Canadian Centre for Policy Alternatives said last week that federal government cuts could chop 60,000 to 68,000 jobs from the public service in the next few years -- bringing it to the lowest level of staffing since 2000.

A consensus seems to be forming that governments should make a few budget cuts now, but make more later when the economy is in better shape.

Even Nouriel Roubini, the "Dr. Doom" who predicted the American housing crash, says fiscal austerity in the short run will make slow growth worse. Cuts, he says, should be spread out "over time."

"Markets force you into austerity, which makes the recession worse, which deepens the fiscal deficit, requiring more austerity," he told the Globe and Mail.

Canada is better off economically than the U.S. and many European nations, but the government says our economy is fragile and last month we saw the biggest job losses since the last recession.

The International Monetary Fund, a monitor of global financial affairs, said last week Canada's economy will only grow now by 1.7 per cent, compared to 2.3 per cent in 2011.

Government spending should not be the only concern of the Harper government. It should also be interested in giving the economy a push and increasing government revenues by implementing useful programs that don't require a lot of money.

Programs such as improving innovation and productivity; increasing trade in and outside Canada; setting up better skills training for youth and the older unemployed; opening Canada up to more competition from foreign companies and making transportation easier for exporting companies.

Ottawa's in-baskets are overflowing with ideas along these lines -- and have been for years. There's lots from which the Harper government can choose. If it wants to.

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